$450m (+67.5) sen unsec cb coming tonight from MS/JPM/GS. Terms: 5yr, 2-2.5% up 30-35%, full pctns. 2.7 stk placement (Musk intends to take 500k). UOP = repay DOE loan. Stk +158% ytd boosted by good Q1 numbers (stk +50% in last 5 days w/short covering playing a major factor) 115m shares o/standing w/only 66m free float (40% short interest) Borrow 20-30% with this unlikely to change short term. Equity+dividend play, if u will like CB, esp as consensus opinion denotes a real b/floor of 91 (See credit color). Growing opinion that this is a viable business and not just fad (50% of production target achieved in US alone). Stock valuation stretched but skewed by short squeeze. Well regarded more reliable product and liquidity boost + Mush $100m stand may get shorts very nervous. BUY
Tesla: Founded in 2003 and listed in 2010 – designs, manufacturers & sells high end zero-emission electric cars, electric packs and components. They have c2.3k cars on the road and 34 stores and 41 service locations.
A growth story, which is showing tentative signs of delivering, sales have been on the up going from 26m in Q2 12 , $50m in Q3 12, $307m in Q4 12 to $550m in Q113 – FY 2013 est $1.9B (+350% yoy). Profitability has been also improving, EBITDA loss for FY 2012 was reported at $365m, but in Q12013 this had turned to a small positive of $15m – for FY 2013 EBITDA is estimated at $50m and for FY 2014 $250m. Free cash flow was +10m in Q1 13 compared to -117m for Q1 12
The company is raising a total of $830m via $450m CB and equity issuance. The CEO and founder (former paypal) is intending to purchase a total of $100m equity. The proceeds will be used to repay the DOE loan ($440m) with the remainder being used for general purposes – we estimate pro-forma cash of $605m on balanced sheet. The CB will be the only real piece of debt outstanding – the company seems to have had to renegotiate covenants on the DOE loan so prob good to refi the loan. There are small off balance sheet and contingent liabilities – hence leverage will be very low assuming +ve FCF going forward.
A very inflated stock with P/E of 38x based on 2015 analyst expectations, reflecting the growth story and the short squeeze (potentially). The refinancing and equity injection should reduce the financial risk associated to the company and give customers potentially more comfort associated with the warranties. The question is really – Can Tesla move to the next level and mass market the vehicles or will it remain a niche market? There is certainly risk associated to the technology but credit investors should feel comfortable with the CB being the only real financial debt on balance sheet.
We think TSLA should trade in-line with BB credit and fair credit spread of 325 bps.
**** New Deal Commentary ****
Tesla announcing a massive capital raise last night, including a $450mm 5yr sr convert and 2.7mm shares of common. Px talk 2-2.5s up 30-35, but limited borrow on the stock. Proceeds of the capital raise to fund the repayment of a $465mm line of credit w/ the US Dept of Energy as well as to fund operating costs and capex for the roll-out of its upcoming Model X SUV version. Pro forma for the concurrent deals, should leave cash at close to $450mm after repayment of the DOE. Borrow very limited on the common and we are not aware of an underwriter borrow facility on this issue. We estimate fair value of credit to be in the area of L+550-600, reflecting relatively low leverage and enhanced capital flexibility post-transaction, a reduction in cash burn this year due to higher capacity utilization, and significant boost in cash levels through the capital raise. Were the company to be rated, we estimate a rating of B to B+ due to the reliance on relatively new technology, uncertainty over potential market share, and lack of revenue diversity. Uncertainty over future liquidity and the competitive landscape also should be taken into acct.
Near-term, while the co. was slightly FCF positive in 1Q13, it burned $381mm LTM. For FY13, Street EBITDA and capex estimates suggest a burn closer to $175mm, which should be easily absorbed by co’s liquidity. That said, at 24x FY15 Street EBITDA, which implies annual rev growth of 25-35%, stock looks fully priced. At this level, unlikely that it discounts any risk of sudden production setbacks or slowdown in sales pace could send stock back toward its late 2012 level in fairly short order.
TSLA’s current production model is the Model S, which retails between $62,400-
$87,400 depending on power choices, net of a $7,500 federal tax credit. Model S began production in June 2012 and through 1Q13, 7,500 units have been delivered to North America, including 4,400 in the 1Q. Current production capacity is about 20,000 units/yr or ~400 per week, suggesting capacity utilization around 80-85%. Wait time for a new order is estimated to be around 2 mos. Assuming they can sell all 20,000 units at the full 87,400 per, revenue from car sales alone should be about $1.75bn vs. Street FY13 estimate of $1.9bn. Gross margin targeted to be 20%, implying total opex for R&D and selling costs of $363mm, suggesting a 14% reduction yoy. Model X expected to launch this year at an initial production rate of 10-15k units/yr.